Oil majors gushing in cash despite cheap crude

Paris: The prospect of crude remaining near the current USD 50 level is no longer a doomsday scenario for the world's oil majors whose latest earnings announcements show that cost-cutting lets them turn a profit even at these price levels.

BP, Chevron, ExxonMobil, Shell and Total have all published results in recent days, showing they pocketed USD 23 billion in net profit in the first half fo the year.

Either they increased their earnings or at least returned to profit compared with the same period last year.

With the exception of ExxonMobil they all benefitted from an increase in output from the same period last year, but more importantly they all profited from a rebound in crude prices as OPEC members and Russia agreed to limit production.

The price of the international benchmark Brent crude averaged USD 51.7 per barrel in the first half of this year, up considerably from USD 39.8 during the same period last year.

While the profits are still less than half of what the firms turned in during the same period three years ago when Brent was trading at over USD 100 per barrel, they show that the major firms can survive profitably if crude prices stay at current levels, a scenario many now foresee.

"It is a tough environment and it could remain that way for some time," said BP's chief executive Bob Dudley earlier this week. "But we are building a business that is resilient to these changing conditions," he said.

After crude prices began their descent in 2014 the oil majors reacted quickly: cutting costs, selling off assets judged non-strategic and focusing on the projects they considered the most profitable.

"Big Oils are showing strong ability to adapt to lower oil prices through cost cutting," said analysts at US investment bank Goldman Sachs in a recent report.

By one measure, free cash flow - or the amount of funds a firm has left over after investments needed to maintain or expand their assets - they may even be better off.

Goldman Sachs analysts said European oil majors had a higher cash flow in the first half of this year than in the first half of 2014, when crude prices were more than double of what they are today.

"Recent results are good news and average production costs have fallen by 40 per cent since 2014," said David Elmes, and energy specialist and professor at Warwick Business School.

"The important part of recent results is how firms are back to generating enough cash to cover such costs" like investment and high dividend payments that have kept many long-term investors on board, he told AFP.

While cheap oil was initially viewed as a phase that would soon pass relatively quickly as global demand continued to climb upwards, a shift has occurred and many now see lower prices as here to stay for a while.

Shell's chief Ben van Beurden said the firm is now working with a "lower forever mindset".

He said that Shell still believes there is a better than 50-50 chance that crude prices will trend higher in the coming years, but wasn't going to base its business decisions on that.

"We do not want to have the mindset that higher oil prices are around the corner to help us out," he said. (AFP) MRJ

In fact, segment leaders like Maruti Suzuki, Tata Motors and Hero MotoCorp have reported de-growth of 34.3 per cent, 45 per cent and 20 per cent, respectively giving a clear indication of a prolonged slowdown in the sector.